Berkshire Hathaway Pulls Back on Risk, Waits on AI as Q1 Income Slips 14%

Berkshire Hathaway (BRK.B) reported a 14% year-over-year decline in Q1 2025 operating earnings to $9.64 billion, marking a strategic pivot toward risk reduction amid geopolitical and market uncertainties. The results underscore CEO Warren Buffett’s longstanding philosophy of prioritizing capital preservation over aggressive growth—a stance that appears increasingly deliberate in light of rising tariffs, currency fluctuations, and the evolving role of artificial intelligence (AI).

Q1 Earnings: A Cautionary Turn

The drop in earnings was driven by a 48.6% plunge in insurance underwriting profits to $1.34 billion, with Southern California wildfires costing $1.1 billion in claims. Foreign exchange losses of $713 million further pressured results, as the U.S. dollar weakened against global currencies. Despite these headwinds, Berkshire’s cash reserves hit a record $347.7 billion—a 4% increase from late 2024—highlighting its reluctance to deploy capital in an overvalued market.

While the S&P 500 fell 3.3% YTD through Q1, BRK.B shares rose nearly 19%, reflecting investor confidence in its fortress balance sheet and disciplined strategy.

Risk Reduction: Pruning Non-Core Assets

The conglomerate has systematically reduced exposure to volatile sectors. Notably, it sold its remaining $7 million in Upstart loans—a portfolio linked to algorithmic underwriting—at a 24% discount, part of a broader effort to “de-risk the balance sheet.” Such moves align with CEO designate Greg Abel’s focus on operational excellence, particularly in core divisions like BNSF Railway and Geico.

In its insurance operations, Berkshire maintained robust asset quality: nonperforming loans (NPLs) hit a 20-year low of 25 basis points of total loans, while reserves covered NPLs by 500%. These metrics suggest a conservative approach to credit risk, even as macroeconomic uncertainties loom.

Geopolitical Risks and Trade Tensions

Berkshire explicitly flagged tariffs and trade policies as “material risks” impacting supply chains and customer demand. The firm’s railroad subsidiary, BNSF, and global operations face rising costs, but its diversified portfolio—spanning utilities, manufacturing, and retail—buffers against sector-specific shocks.

Buffett’s criticism of tariffs as an “act of war” highlights the firm’s ideological stance against protectionism, though its global investments, including $334 billion in Japanese trading firms, position it to weather regional volatility.

AI: Testing the Waters, Avoiding the Hype

Vice Chairman Ajit Jain acknowledged AI’s potential to streamline claims processing and underwriting but emphasized Berkshire’s wait-and-see approach. “We are not the fastest or first movers,” he stated, warning against “spending enormous amounts chasing fashionable things.”

While the firm “dabbles in AI” to test applications like fraud detection, its $347 billion cash hoard ensures flexibility to act decisively when opportunities crystallize. This cautious stance contrasts with peers rushing to invest in AI, aligning with Buffett’s value-investing ethos of avoiding overvaluation.

Conclusion: A Resilient Play for the Long Term

Berkshire’s Q1 results reflect a calculated shift toward risk mitigation, with its record cash reserves and robust balance sheet positioning it to capitalize on undervalued opportunities. Despite the earnings slump, its stock outperformed the broader market, signaling investor trust in its ability to navigate volatility.

Key data points reinforce this thesis:
- Cash reserves: $347.7 billion (up 4% YTD), enabling opportunistic moves.
- Asset quality: NPLs at 25 bps, reserves covering NPLs by 500%, and a 3.24% net interest margin.
- Market performance: BRK.B’s 19% YTD gain vs. the S&P 500’s 3.3% decline.

While AI adoption remains a wildcard, Berkshire’s disciplined approach—rooted in patience and prudence—aligns with its century-old mantra: “It’s far better to be approximately right than precisely wrong.” For long-term investors, the results affirm that Buffett’s risk-aware strategy remains a stalwart in turbulent markets.